There’s no way around it — college is expensive. This means that for many students, taking out a loan is the only way to realistically cover these expenses. And, like most other loans, student loans accrue interest.
In this article, we’ll explore the current interest rates across the most common student loan products, including federal and private student loans.
Comparing Rates Between Federal, Private and Refinance Loans
Something you may notice is that, at the lowest end, private lenders seem to offer better interest rates than federal. It is important to note that these lowest interest rates are very difficult to get — your credit needs to be outstanding.
It’s also important to remember that, although fixed interest rates appear to have a higher range in the tables below, your interest rate by definition can change. So, while you may qualify for a lower interest rate on a variable-rate loan, it’s entirely possible that this rate will eventually go up and become higher than you would have gotten with the fixed-rate loan. This is simply the tradeoff (and risk) of variable interest rates.
Federal rates increased across the board for the 2021-2022 school year by nearly a whole percentage point. That’s unfortunate, but they are still lower than they have been for years, and generally much lower than an equivalent private student loan.
Federal loans come in two basic types: subsidized and unsubsidized. The primary difference is around when the interest starts accruing:
- Subsidized student loan: Interest is paid by the Education Department as long as you’re enrolled at least half-time in college.
- Unsubsidized student loan: Interest begins to accrue as soon as the loan is dispersed.
There are some other differences, but they’re relatively minor compared to this.
The last thing to cover with federal loans is the loan fee (also known as the origination fee). This fee is calculated as a percentage of the total loan amount and then deducted automatically from each disbursement. In practice, this means you’ll receive a smaller loan than the amount you actually borrowed.
The wide variation in interest rate ranges is due to two factors: different lenders offering different rates, and the fact that the rate you’ll get is impacted by your credit and other factors.
If your credit is good, it’s possible to refinance your existing student loan to get a lower interest rate. This is not always possible, but it can be an option worth exploring. These refinanced interest rates can themselves be lower than “normal” private rates, so it can be an option worth exploring.
How Student Loan Interest Rates Are Determined
Although federal and private loans are technically different, they often follow similar trends. In other words, when federal student loan interest rates go up, private rates are likely to do the same. Likewise for when they go down. Let’s look at what actually goes into determining federal and private interest rates.
Federal Student Loan Interest Rates
These student loan interest rates are set each year by Congress, based on the high yield of the 10-year Treasury note auction in May. The new rate applies to loans disbursed from July 1 to June 30 of the following year.
Federal student loan rates are always fixed. This means that they won’t change during the life of the loan — whatever interest rate you get when you take out the loan is what you’ll keep until it’s paid off (it changes with student loan refinancing).
Private Student Loan Interest Rates
These loans are funded by banks, credit unions, and other private lenders. As such, interest rates vary between the different lenders, and it’s worth shopping around whenever possible.
Private lenders usually offer both fixed-rate and variable-rate loans. Fixed-rate means that your interest rate remains the same over the life of the loan. It can neither increase nor decrease.
A variable interest rate, on the other hand, means that your interest rate can fluctuate with the market. Sometimes you can get lucky and have it go down for a period of time. However, the risk with variable-rate loans is that the interest rate goes up significantly and you end up paying much more than anticipated.
It’s important to keep this in mind when selecting a loan. It may be worthwhile to take a slightly higher fixed interest rate rather than assume the risks of a variable rate.
The Impact of COVID-19 on Student Loans
The interest rate cuts in 2020 had a major ripple effect on student loan interest rates. Despite the slowly recovering economy, interest rates remain lower than they’ve been in years, for federal student loans and private fixed-rate and variable interest rate loans. This is excellent news for student loan borrowers, and we hope to see these rates remain low in the coming year.
Currently, all federal student loan debt is frozen until Sept. 1, 2022. This means that rates are set to zero and no payments are due until that date. This loan repayment freeze originally began in March 2020 at the outset of the pandemic and has been extended six times at this point.
The Pros and Cons of Federal Student Loans vs. Private Student Loans
Let’s explore the pros and cons of the two major classes of student loans — federal and private. Neither is perfect, as we’ll see. Rather, each is suited to particular situations and types of borrowers.
Federal Student Loans
Private Student Loans
Frequently Asked Questions (FAQs) About Student Loan Interest Rates
If you still have questions about student loan interest rates, don’t worry — we’ve got answers. Here are some of the most common questions.